Legal News

D.C. Circuit: Not so Fast on the Whole Foods-Wild Oats Merger

By Dan Slater

A timeline for your perusal:

• In February, 2007, Whole Foods announced its plan to buy smaller rival, Wild Oats, for $565 million.
• Five months later, the FTC sued to block the deal, saying it would stifle competition in the market for natural and organic groceries.
• In August, District Judge Paul Friedman denied the FTC’s request to block the deal, concluding that that it had failed to prove that the merger would hurt competition.
• Today, the U.S. Court of Appeals for the District of Columbia reversed Friedman, ruling that Judge Friedman “underestimated the FTC’s likelihood of success on the merits” when he denied the agency’s request. Here’s the opinion. Here’s a Reuters report.

Judge Janice Rogers Brown, writing for the three-judge panel, praised Friedman, saying his “thoughtful opinion” had been “produced under trying circumstances.” They also leveled some criticism at the FTC, saying it had “presented, at best, poorly explained evidence.” Nevertheless, the appeals judges agreed with the FTC that Friedman had misconstrued a key legal point used to define the market at issue in the case. They remanded the case back to him for further proceedings.

That key point concerned marginal customers versus core customers. Judge Friedman confined his analysis to whether marginal customers would, in the event of a price increase, for instance, take their food-buying business to a conventional grocer. Judge Brown wrote:

The district court assumed “the ‘marginal’ consumer, not the so-called ‘core’ or ‘committed’ consumer, must be the focus of any antitrust analysis.” . . . .To the contrary, core consumers can, in appropriate circumstances, be worthy of antitrust protection. . . .The district court’s error of law led it to ignore FTC evidence that strongly suggested Whole Foods and Wild Oats compete for core consumers within a [premium, natural and organic supermarkets] market, even if they also compete on individual products for marginal consumers in the broader market.

Now the case goes back to Friedman, who will have to rule on the merits. If he sides with the FTC, what are possible remedies (given that the merger has already gone through)? According to Jane E. Willis, a partner at Ropes & Gray who specializes in antitrust and merger advocacy, a divestiture of stores in areas that raise antitrust concerns is a likely outcome.

Full post as published by Law Blog - WSJ.com on July 29, 2008 (boomark / email).